Author Topic: how to switch from accumulation phase to draw down phase  (Read 1687 times)

bluebelle

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how to switch from accumulation phase to draw down phase
« on: January 20, 2018, 05:55:17 PM »
I think the most common definitions of FI is "passive income exceeds expenses' or a net worth of 25x expenses.

My question is for folks that don't have a high passive income, how do you structure your drawdowns?  Monthly, quarterly, etc, and if you do a monthly draw down, how do you decide which fund or asset to cash in?  Do a rebalance, and take the funds from that?

Background:
1) hubby will get a moderate DB pension at 55 (our planned retirement date), not enough for us to live on, but a nice start
2) We will have sufficient assets in registered and non registered accounts to make up the shortfall at a 3.5% withdrawal rate
3) excluding one off type expenses (replace a car, roof, furnance etc), we'll need approximately  $2K a month
4) Our current investment mix is more 'growth' focused and doesn't throw sufficient dividends to makeup the shortfall - we'll have to sell some assets

Question, for those of you in a similar situation:
1) did you set up automatic monthly disbursemnts? 
2) did you restructure to create more income focused investments?

Knowing myself, if I don't have some kind of structured/planned disbursements, I'll agonize over when/what to sell and somehow try and 'time' the market.  Or live too much like a pauper to try and stretch out the next withdrawal. 

Financial.Velociraptor

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Re: how to switch from accumulation phase to draw down phase
« Reply #1 on: January 20, 2018, 07:05:39 PM »
I have a high allocation to fixed income in closed end funds and high yield securities.  My dividends, distributions, and interest exceed my budget.  I have a fixed amount transferred from brokerage to checking each month.

jim555

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Re: how to switch from accumulation phase to draw down phase
« Reply #2 on: January 21, 2018, 06:04:25 AM »
I have a high allocation to fixed income in closed end funds and high yield securities.  My dividends, distributions, and interest exceed my budget.  I have a fixed amount transferred from brokerage to checking each month.
There have been many studies that show total return investing is better than dividend investing. 

Using the 4% rule one would need to sell some shares to make up for the lack of dividend yield.  Total market funds pays about 1.7%.  So sell 2.3% of the shares to get to the 4% level.  Over time dividends should increase as the economy grows and reduce the need to sell shares.

lagniappe

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Re: how to switch from accumulation phase to draw down phase
« Reply #3 on: January 21, 2018, 07:22:15 AM »

My question is for folks that don't have a high passive income, how do you structure your drawdowns?  Monthly, quarterly, etc, and if you do a monthly draw down, how do you decide which fund or asset to cash in?  Do a rebalance, and take the funds from that?
...

Question, for those of you in a similar situation:
1) did you set up automatic monthly disbursemnts? 
2) did you restructure to create more income focused investments?
 

My approach has been to rebalance annually, taking out the amount of cash I needed for the year.  The annual spend amount went to a high yield savings account.  Monthly transfers to my checking account from the high yield savings account.

I allow dividends and capital gains to accumulate in cash in my brokerage account, ready to be part of the rebalance-after-taking-out-a-years-spending cycle the following year. Since most of my dividends and capital gains are paid in December and I rebalance in January, I usually got a big cash infusion just before the rebalance. 

This year is the first year that my dividends and capital gains distributions from my basic 3 fund portfolio will likely cover all of my expenses.  I am assessing whether I need to do anything differently as a result.

RedmondStash

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Re: how to switch from accumulation phase to draw down phase
« Reply #4 on: January 21, 2018, 12:01:22 PM »
My question is for folks that don't have a high passive income, how do you structure your drawdowns?  Monthly, quarterly, etc, and if you do a monthly draw down, how do you decide which fund or asset to cash in?  Do a rebalance, and take the funds from that?

We are newly FIRE and wrestling with the same question. I just got a book that was recommended on this forum from the library: Living Off Your Money, by Michael H. McClung. It's about managing investments while you're retired and living off them; it might have useful suggestions.

Right now, I'm thinking we'll do quarterly withdrawals while the market is doing well, and then live off our cash reserves when the market inevitably tanks. Spouse is getting SS benefits, and we've set our taxable account to drop dividends into a cash account instead of reinvesting them. Our retirement accounts are set to have dividends reinvest. So we automatically get SS + taxable dividends, which means we have to make up the rest via selling things.

I plan to draw down from our taxable account first, while annually converting as much of our IRAs to Roth IRAs as we can while keeping our taxes relatively low, so that our eventual RMDs are also relatively low.

Our approach is partly about cashing out the $$ to live on, and partly about strategizing to keep taxes low in the future.

Hope that helps. Putting this stuff into practice can be really nervewracking.

bluebelle

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Re: how to switch from accumulation phase to draw down phase
« Reply #5 on: January 21, 2018, 03:26:25 PM »
I'm not sure if it applies to the US, but in Canada, once we've converted our RRSPs (similar to 401Ks I think), to RRIFs (which must be done by the year we turn 71), we have minimum withdrawal amounts (government want's its money, it is tax deferred after all, and they think they've waited long enough).  If you are in the lucky position to have "too" much in your RRIF, those withdrawal amounts can get pretty high in later years, especially if one spouse passes and their account rolls over to the other tax free.  Now you've got a bigger pot with the same minimum withdrawal rate.

I listed the above to explain our withdrawal strategy - I plan to pull money from our RRSPs in the early part retirement up to the limit that would take us to the next tax bracket.  I believe this will give us the lowest lifetime tax hit.

We won't be drawing our CPP (similar to the US's SS, but smaller) or OAS (every Canadian who has been a resident for 10 years and is over 65 and doesn't exceed an income of approximately $71K) for the first 10 years of retirement.

Thank you for the book recommendation, I'll look it up.

Greystache

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Re: how to switch from accumulation phase to draw down phase
« Reply #6 on: January 22, 2018, 07:35:43 AM »
We retired at age 55 with a small pension and cash, municipal bonds, cds, Roth and 401K/403b. We decided to take the pension in a ten year payout. This funds most of our budget. The rest is paid out of cash, cds, and Munis. We are motivated to keep our MAGI low enough to qualify for Obamacare subsidies, so we have not taken distributions from the 401k/403b accounts and have not done any Roth conversions.  When the pension payments stop at age 65, we will decide when to start claiming SS, based on our investment performance and health.  Ideally, we will live off of 401k/403b distributions until we turn 70 and then start taking SS.

Blissful Biker

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Re: how to switch from accumulation phase to draw down phase
« Reply #7 on: January 22, 2018, 10:04:52 AM »
We are newly FIRE and wrestling with the same question. I just got a book that was recommended on this forum from the library: Living Off Your Money, by Michael H. McClung. It's about managing investments while you're retired and living off them; it might have useful suggestions.

PTF.  Also, thanks for the book recommendation.  I am ordering it from the library.  I am a few years from FIRE and still have much to learn.

Gimesalot

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Re: how to switch from accumulation phase to draw down phase
« Reply #8 on: January 22, 2018, 10:31:14 AM »
We have two income producing investments, rentals and stocks.  So my plan is to withdraw a set amount from the rental account every month and then withdraw the rest from the investment account every 3 months, at least for the first year or two.  If there is any left over after the 3 months, then I will "top-up" the balance  I like this approach so that I don't try to time the market, but also, so I don't have a lump of cash just sitting in a savings account, instead it is invested hopefully increasing in value and earning dividends.